When I have conversations with business owners, one of the things I try to find out is whether they are managing their finances and cash flow effectively. Those conversations go a little like this:
- Q. How is your profit?
- A. OK, my sales were up last month.
- Q. Great! But I asked how your profit level was?
- A. Oh, well I don’t know my books haven’t been updated in six months.
- Q. OK, well how is cash flow then?
- A. Not great, I am having trouble paying my bills because my customers aren’t paying on time. It’s causing problems for me and my business but I don’t know what to do about it.
And so it goes, business owners living in the moment, managing day-to-day, and not taking steps to run a healthy business. Here are five common mistakes that I see business owners make when managing the financial aspects of their business.
1. Not Using the Information Right in Front of You
The best information you have about your business is in your own books. The books tell you how much you sold, how much you spent, what is left in profit, how much cash you have, how much cash you owe and how much cash is owed to you. If you don’t keep up with this information, you only know part of your financial picture. You are losing the valuable opportunities to analyze results, determine real profitability, manage cash flow and identify problems in your business.
2. Ineffective Cash Flow Management
This is one of those critical areas that can make or break a business. Cash flow becomes even more important for a growing business, because typically the investment in growth occurs before the rewards of that growth are realized. Like the old adage says, “You have to spend money to make money.” In many small businesses, cash flow is the lifeblood that keeps you in business and is needed to build cash reserves to finance future growth. Unlike larger businesses that may have credit more readily available, a smaller business will sometimes need to finance its own growth, thus making cash flow management a very important factor in its ability to expand.
3. Ignoring Receivables
Getting paid, sounds easy, right? Not always. Too many late paying or non-paying customers can choke your business. While this discussion could fit in the cash flow section, it deserves additional emphasis. Collections, collection policies, timely follow-up with customers, steps to reduce exposure, and other techniques are important to ensure that you get paid on time and keep cash flowing into your business.
4. Using Credit Effectively
No one in their right mind would purchase a house with a credit card; you would never pay it off with interest rates that high. Using the right type of credit for your purchases is essential to good credit management. The type of credit a business uses for short-term cash needs like inventory should not be the same as the credit facility it would use to purchase a new expensive piece of equipment or longer lived asset like a new building. If you need to use credit to finance part of your business, work with your lender or advisor to make sure you are using the right credit for the situation.
5. Not Measuring Your KPI’s
I have talked to business owners who thought that they were doing well, only to show them that they could be doing much, much better. If your books and financial statements are current, you will be able to calculate key ratios for your business. KPI’s are key performance indicators and while there are some that are fundamental for all businesses, some may be more important than others for your own business. Determining and measuring what makes your business successful through your own KPI’s will help you take action when needed. KPI’s like profitability, inventory turnover, average collection periods, gross margins, productivity ratios and host of others will help you target inefficiencies in your operations, opportunities for improvement and cost savings as well as other ways to increase profitability.
Business owners must step out of the day-to-day chaos and look at the bigger financial picture. Avoid these mistakes and you will be on the right track to managing, improving and taking control of the financial health of your business.
About Author: Lisa Roberts works with business owners who are frustrated, confused and overwhelmed trying to manage their company’s growth. She helps businesses build a strong foundation from which they can grow successfully. Feel free to visit her website at http://www.bizrx-advisors.com
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